Markets Enjoy A Calm Moment

[Redator]

Overview: After a volatile start to the week, the capital markets are quieter and the ceasefire between Israel and Iran appears to be holding. The Trump administration is challenging reports that claim the barrage of US bombs merely set back the Iranian nuclear project by a few months. No coup de grace was delivered. The dollar, which was sold to new lows for the year against the euro and sterling yesterday, is trading with a firmer bias today. The Australian and New Zealand dollars are slightly firmer but the other G10 currencies are softer, led by yesterday's outperformers, the Japanese yen (~-0.5%) and the Swiss franc (~-0.30). Emerging market currencies are mixed. Central European currencies are mostly softer, while Asia Pacific currencies are mostly a little higher. The Chinese yuan and South Korean won are exceptions. 

Asia Pacific equities extended yesterday's rally. Hong Kong, China, and Taiwan indices rose more than 1%. Europe's Stoxx 600 rose 1.1% yesterday but is hovering around unchanged in late morning turnover. US index futures are steady to slightly firmer. Benchmark 10-year yields are mostly softer. In Japan and the Antipodeans, rates are 2.5-4.5 bp lower. European yields are around 1 bp lower, and German Bunds are underperforming again, amid pending supply. The 10-year US Treasury yield is little changed near 4.29%. Gold is nursing yesterday's 1.3% drop and has little more than steadied today. August WTI fell 7.2% on Monday and another 6% yesterday. It has up about 1% today to push back above $65. It is not clear what President Trump meant by saying that China was free to buy Iranian oil. The White House seemed to clarify this to mean that the Strait of Hormuz would not be closed insists the sanction against Iranian oil remains intact. 

USD:  The risk-on, associated with the fragile cease fire in the Israel-Iran conflict saw the dollar sold aggressively. The Dollar Index gapped lower yesterday and approached the three-year low set earlier this month, near 97.60. The gap is found between about 98.27 and 98.35. It has technical significance after the key downside reversal on Monday. It is consolidating quietly in a narrow range--roughly 97.80-98.10. Federal Reserve Chair Powell delivers the second installment of his semiannual congressional testimony today. The message is the same though the questions differ. Powell largely reiterated what he said at the press conference following last week's FOMC meeting. He was more explicit in linking the tariffs to the inflation expectations, the base line of which is higher than projected. If it were not for this, Powell said, the Fed would have continued the easing cycle. Despite two Fed governors indicating they would consider a cut at the next meeting at the end of July, the Fed funds futures market is dubious. There is about a 20% chance of a cut discounted. At the end of last month, the implied probability of the pricing in the Fed funds futures market was closer to 28%. The US reports new home sales, and after a heady 10.9% rise in April, they are expected to have slipped in May. The median forecast in Bloomberg's survey is for a 6.7% decline. That would put the seasonally adjusted annual pace around 694k. In May 2024, it was at 665k.

EURO: The euro was bid to a new marginal three-year high yesterday near $1.1640, and after three tries earlier this month, settled above $1.1600. The next target is in the $1.1700-20 area. Since the high was recorded, the euro has not traded below $1.1590. So far, yesterday's high has held and the high today is about $1.1630. Yesterday, the German government announced intentions to borrow 118.5 bln euros in Q3 25, which is nearly 20% more than initially planned. The new spending will be focused on public infrastructure and defense. The eurozone's auto registrations, a proxy for sales, fell on a year-over-year basis each month in Q1 but recovered in April. In May it was 1.6% higher. In comparison, US May auto sales were down about 1.6% year-over-year, but the year-to-date on a year-over-year basis, US auto sales are up around 5.6%, flattered by the front running of tariffs, which, arguably, brought forward purchases.

CNY: The broad decline in the US dollar saw it record a marginal new low for the year today near CNY7.1605. Last month's low was about CNH7.1615. Yesterday's low was about CNH7.1630. Against the onshore yuan, the dollar retested the low for the year set last month at CNY7.1680. The PBOC has been setting the dollar's reference rate mostly lower in recent weeks, and this effectively lowers the dollar's upper band, but the challenge is to stabilize the dollar's downside. We suspect the PBOC may consider changing tactics and begin to raise the dollar's fix. Yesterday's fix was set 0.08% below Monday's, which matches the largest adjustment since the end of May. Today's reference rate was set at CNY7.1668 (yesterday's fix of CNY7.1656 was the lowest since early last November). 

JPY: Over the last three sessions, the US 10-year yield has fallen by 10 bp, half of which took place yesterday. The dollar's nearly 1.5% loss offset the previous three days of gains in full. The drop overshot the (61.8%) retracement of the last leg up that began on June 13 near JPY142.80. The greenback found support closer to the 20-day moving average (JPY145.50) than the retracement objective (~JPY144.80). Yesterday's low has held, and the dollar recovered back to almost JPY145.70 in the European morning. Japan reported May service producer prices earlier today. The year-over-year pace eased to 3.3% but only because the April reading was revised to 3.4% from 3.1%. Last May, it was up 2.7% year-over-year. A hawk on the BOJ (Tamura) warned that it may still be necessary to hike rates despite the economic uncertainty. Although some, like Bloomberg economists, anticipate a July hike, most do not. In fact, the swaps market has less than a 5% chance discounted. The market is pricing in about 12-13 bp of tightening before the end of the year. There were 18.5 bp that priced in early June, the most in two months. 

GBP: Sterling traded at a five-week low on Monday near $1.3370 and yesterday set a new three-year high slightly shy of $1.3650. It settled near the highs, underscoring the powerful momentum, and just inside the upper Bollinger Band. It is consolidating in a narrow range today (~$1.3605-$1.3635) but looks heavy. Sterling's strength, which still strikes us as primarily a reflection of the greenback's weakness, is also boosting confidence that the Bank of England will cut rates at its next Monetary Policy Committee meeting in August. The odds are creeping up for the fifth consecutive session today and are at their highest (~85%) since early May. 

CAD: The Canadian dollar eked out a minor gain against the greenback yesterday. The only G10 currency that did worse was the Norwegian krone, which often acts more like a petro-currency. In fact, over the past 30 sessions, the correlation of US dollar's changes against the Canadian dollar and WTI is modestly positive this month. Last month, it was mostly inversely correlated. After recording the high for June, a whisker below CAD1.38 on Monday, the greenback recorded a four-day low yesterday near CAD1.3680. It recovered and set the North American high in late dealings near CAD1.3725 before consolidating. In subdued trading today, the greenback is trading mostly between CAD1.3715 and CAD1.3735. Canada's May CPI was largely in line with expectations when it was reported yesterday. The year-over-year pace was steady at 1.7%, while the underling core measures slipped by 0.1% to 3.0%. The swaps market was little changed, and the next cut is nearly fully discounted (~95%) at the October meeting.

AUD: The Australian dollar's recovery was sharp. It was sold to a six-week low on Monday (slightly below $0.6375) and rebounded to almost $0.6520 yesterday. The seven-month high set earlier this month was Australia's about $0.6550, which met the (61.8%) retracement objective from the from last September's $0.6940 high to the April low near $0.5915. There has been no follow-through activity today and the Aussie is consolidating in a narrow range in the upper end of yesterday's price action--mostly $0.6490-$0.6505 today. May CPI moderated to 2.1% from 2.4% in April. It matches last year's low. The trimmed mean eased to 2.4% from 2.8%. The futures market had been fairly confident of a rate cut at the central bank meeting on July 8, and has been rarely below 80% discounted this month. It did edge up to almost 90% today. 

MXN: After peaking on Monday near MXN19.3430, the dollar reversed lower. It settled near its lows and proceeded to fall slightly through MXN18.95 yesterday. It is straddling the MXN19.00 in the European morning. The median projections in Bloomberg's surveys this year have consistently under-appreciated the underlying demand for the peso. Mexico offers a large interest rate pick-up against the dollar (and other funding currency candidates, and its implied one-month volatility is slightly less than the yen and a little more than the Swiss franc. The market may turn a little cautious ahead of the central bank meeting on Thursday. Yesterday's mid-June CPI report showed price pressures remain elevated, with the headline and core rates above the target range. A deputy governor of the central bank argued against another (the fourth in row) half-point cut, but the Governor seemed to endorse the larger move and the vast majority of economists in Bloomberg's survey also anticipate a 50 bp cut. Meanwhile, reports suggest the US will likely introduce a quota system to reduce the tariffs on some volume of Mexican steel, which US industry (e.g., autos) need. A similar agreement was struck in President Trump's first term and is similar to agreement reached with the UK on autos. 

  

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